Efficient Market Theory and the Crisis

Neither the rating agencies' mistakes nor the overleveraging by financial firms was the fault of an academic hypothesis.

By

Jeremy J. Siegel

Updated Oct. 27, 2009 10:13 pm ET

Financial journalist and best-selling author Roger Lowenstein didn't mince words in a piece for the Washington Post this summer: "The upside of the current Great Recession is that it could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis." In a similar vein, the highly respected money manager and financial analyst Jeremy Grantham wrote in his quarterly letter last January: "The incredibly inaccurate efficient market theory [caused] a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments [that]...